SPC00550

Capital gains tax – purchase of plot held for some years – subsequent construction of only or main residence – later disposals of two plots – what deductions allowable – extent of “permitted area” – whether period of ownership began with construction of residence or acquisition of land – whether apportionment necessary – details submitted on Forms R40 and SA108 – whether “returns” – whether enquiry properly commenced – whether assessments valid – whether enquiry for following year valid

THE SPECIAL COMMISSIONERS

	ANTHONY JOHN HENKE AND ALICE JOYCE HENKE	Appellants

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

		Special Commissioner: 	JOHN CLARK 

Sitting in public in London on 1 and 2 March 2006

Anthony J Henke in person for the Appellants

Bob Kelly of the Central England Appeals Unit, HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2006

DECISION

1.	This appeal concerns capital gains arising on the sale of two plots from a larger plot on which Mr and Mrs Henke had previously constructed the house which became, and continues to be, their principal private residence. The principal issues to be considered are:
(1)	the validity of discovery assessments made on them in respect of the year 1999-2000;
(2)	the validity of the enquiry into their 2000-01 self assessment returns;
(3)	the costs to be allowed against the sale proceeds from each plot in the computation of the chargeable gains;
(4)	the size and location of the “permitted area” in relation to the principal private residence;
(5)	whether any private residence relief in relation to the sales of each plot needs to be restricted to exclude the period between the date when the land was acquired and the date on which the house became their only or main residence.
The facts
2.	The factual material before me was very extensive. In addition to a lengthy statement of facts not in dispute, there was an agreed bundle of documents. Mr Henke submitted various Reports containing a mixture of factual material and argument; these were dated December 2000, July 2004 (together with two binders containing a large number of appendices), January 2006 (also containing his submissions for the hearing), and an Addendum dated February 2006 containing his response to the Expert’s Report. At the hearing, Mr Henke responded to various questions put to him by Mr Kelly. The only other oral evidence at the hearing was that of Mark Catley, District Valuer, East of England, who presented his Expert’s Report in detail and responded to questions from Mr Kelly and Mr Henke. The following sets out the principal elements of the factual evidence.
3.	Mr and Mrs Henke jointly purchased a freehold plot of land at Houghton, Huntingdon on 25 August 1982. The purchase price was £20,000, with legal costs of £289. After fencing the plot it was found to comprise 2.66 acres. At the time of purchase outline planning permission had been granted for one house to be built on the plot; a permanent covenant was in place under s 52 of the Town and Country Planning Act 1971 restricting development to only one house being erected on the plot.
4.	In September 1990 David Pitts, an architect and practising member of the RIBA, was instructed to design a house to be built on the plot, to be known as Old Oak House. In December 1990 detailed planning consent was applied for; the application included a landscaping plan for the whole 2.66 acre area of the property. Permission was granted on 21 February 1991; development had to commence within five years of that date.
5.	On 28 February 1991 construction work on the foundations of Old Oak House commenced. By a deed dated 10 December 1991 (executed on 3 February 1992) the s 52 restriction was lifted. (This did not affect the existing planning permission for Old Oak House; the release merely made it possible for further planning applications to be made.) Old Oak House was built between June 1992 and June 1993 at a main contract cost of £238,537. On 12 May 1993 the whole 2.66 acre property was mortgaged to secure a loan of £60,000. Mr and Mrs Henke took up residence in Old Oak House in June 1993 and have continued to occupy it ever since. The house is substantial, having approximately 4,500 square feet of living accommodation; it has a large garage block of approximately 1,000 square feet within its curtilage.
6.	Between acquiring the plot in 1982 and 1987, Mr and Mrs Henke lived in an owner-occupied property in Hilton, Huntingdon, which was sold for £160,000. From 1987 until 1992 they lived in an owner-occupied property at St Ives, Huntingdon; this was bought for £102,000 and sold for £116,000. From October 1992 until moving into Old Oak House, they lived in a rented unfurnished property in Cambridge.
7.	On 18 July 1995 detailed planning permission was granted for two dwelling-houses to be built to the front of Old Oak House, on plots within the 2.66 acre plot. Subsequently, each of the plots was sold (see below), but in each case the plot to be sold was maintained until the time of sale as part of the garden and grounds of Old Oak House.
8.	On 15 October 1999, “Plot 1” was sold for £171,000; the proceeds were divided equally between Mr and Mrs Henke. The area of Plot 1 was 0.54 of an acre.  Out of the proceeds, the £60,000 mortgage was redeemed. Subsequently a residential house was built on Plot 1.
9.	On 15 March 2001, “Plot 2” was sold for £230,000, the sales proceeds being divided equally between Mr and Mrs Henke. The area of Plot 2 was 0.54 of an acre. A house was subsequently built on Plot 2.
10.	Having regard to their income, Mr and Mrs Henke normally completed Forms R40 to give details of their income to the Respondents (referred to for all times covered by this decision as “HMRC”) in order to reclaim tax deducted at source from their income. On 15 April 2000 they completed Forms R40 for the year ended 5 April 2000. Each of them ticked Box B on page 1 of the form to indicate that they had disposed of assets for more than twice the annual exempt amount for capital gains purposes. Box B of the form contained the words “Tick this box and we will send you a form R40(CG) to complete.” They submitted these forms to HMRC’s Bootle office.
11.	HMRC dealt with the repayment claims by sending repayment cheques in May 2000. However, there was no further communication relating to capital gains. As no response had been received by August 2000, Mr and Mrs Henke contacted the Huntingdon Tax Office for advice. As a result of discussions with Mrs King of that office, on 16 August 2000 Mr and Mrs Henke sent Forms SA108 showing that Plot 1 had been sold on 15 October 1999 for £171,000, and claiming that full relief was due under s 222 of the Taxation of Chargeable Gains Act 1992 (“TCGA 1992”). These forms had been supplied by the Huntingdon Tax Office, together with a copy of HMRC Booklet COP11 “Enquiries into Tax Returns by Local Tax Offices” and Leaflet IR167 “Charter for Inland Revenue Taxpayers”.
12.	In response to Mr Henke’s letter dated 16 August 2000, HMRC’s Bootle 1 District wrote to him regarding the disposal of land by him and Mrs Henke in October 1999.
13.	Following an exchange of correspondence relating to the status of Forms R40 (considered below), Mr Quayle, a Regional Complaints Examiner based at HMRC’s Bootle office wrote to Mr and Mrs Henke on 25 July 2001 to deal with concerns which they had expressed, and said:
“Our enquiry into your tax affairs for the year 1999/2000 should have been opened properly and in line with our best practice. Unfortunately, this did not happen and I have tried my very best to compensate you for our mistakes within the terms of our Code of Practice. A legal enquiry does however exist, and authority can be found under Schedule 1A Taxes Management Act 1970. Your suggestion that we write to you and agree your claim to relief under section 222 [TCGA] 1992 is not possible until the District Valuer has provided us with guidance as to whether the land/property disposed of can be considered as within the ‘permitted area’.”
14.	On 2 August 2001 Mr Besson of HMRC’s Bootle office wrote to Mrs Henke to confirm that the enquiries were into her 1999-2000 claim form as well as Mr Henke’s, and to provide her with a copy of the Code of Practice.
15.	After a meeting held at HMRC’s Huntingdon Tax Office between Mr and Mrs Henke and Mr Warner and Mrs Johns of HMRC, Mr Besson wrote to Mr and Mrs Henke to tell them that the question of the “permitted area” in relation to Plot 1 was being referred to the District Valuer for a decision. On 8 January 2002 Mr Besson wrote referring to a further disposal of land (Plot 2), on which Mr Henke had requested information as to what would be treated as the date of disposal. The letter also referred to the completion of “your Tax Return/Claim”.
16.	On 9 January 2002 Mr Catley wrote to Mr Henke stating his conclusion that the land disposed of on 18 October 1999 was not required for the reasonable enjoyment of Old Oak House as a residence and therefore did not qualify for exemption. He also stated: “In my opinion the house is capable of reasonable enjoyment without the benefit of the 2 plots which have been sold.”
17.	On 26 January 2002 Mr and Mrs Henke submitted to HMRC’s Bootle office Forms R40 for the year to 5 April 2001 together with completed forms SA108 showing the disposal of Plot 2 for £230,000, divided equally between Mr and Mrs Henke. The forms SA108 showed claims for full relief under s 222 TCGA 1992.
18.	In his letter dated 18 July 2002, Mr Besson said:
“Although the 1999/2000 situation has not yet been resolved I must consider how best to proceed concerning 2000/2001. You have submitted form R40 with pages normally submitted with a Self Assessment return. I have decided to issue a Self Assessment return to you (under section 8 Taxes Management Act 1970) which you should receive shortly. Please complete it and return it to me within the statutory time-limit (which is 3 months from the date of issue).
I appreciate that you have already given information concerning the disposal of the land on the CG schedule submitted with form R40. I am returning this schedule to you herewith. I am quite prepared to accept this as the CG schedule to your Self Assessment return, when submitted, so you do not have the inconvenience of completing this schedule again.”
19.	On 28 October 2002 Mr Catley wrote to Mr Henke, having reconsidered the opinion given in his 9 January letter. Mr Catley said that he did not believe that the property “required” 2.66 acres for its reasonable enjoyment. He attached a plan showing the area that he considered to be “required”. This area was 2.03 acres; he described this remaining area, after the removal of the two former “meadow” areas, as “generous”.
20.	On 14 November 2002 Mr Besson wrote to Mr Henke saying: “I can assure you that there are no ‘significant differences of approach and understanding of this particular CG matter as between Bootle and Huntingdon’ whatever may have happened in the past.”
21.	On 9 December 2002 Mr and Mrs Henke attended a meeting at the Huntingdon Tax Office with Mr Warner and Mrs Johns. The main discussion concerned the computation of the extra tax resulting from Mr Catley’s conclusions. Mrs Johns expressed views concerning the apportionment of the costs. [These are considered below.] On this basis she gave an indication of the total liability that would fall on Mr and Mrs Henke for the two years as a result of accepting the suggested permitted area of 2.3 acres.
22.	During the meeting Mr and Mrs Henke expressed confusion over Mr Besson’s letter of 18 July 2002 (see paragraph 18 above). Mrs Johns advised that they should each complete a self assessment tax return for the year ended 5 April 2001, and assisted in their completion. The SA108 pages previously submitted were included with the returns. All the details on the returns matched the entries on the Forms R40.
23.	On 13 January 2003 Mr Besson wrote to Mr and Mrs Henke. He stated that an enquiry would be needed for 2000-01 for each of them since the Capital Gains pages submitted had been prepared on the basis that no capital gain had arisen on the disposal of land at Old Oak House. This had preceded the conclusion of the correspondence with Mr Catley concerning the principal private residence relief due. On 4 February 2003 Mr Besson wrote separately to Mr and Mrs Henke to give each of them formal notification that he intended to enquire into their returns for the year ended 5 April 2001.
24.	On 26 March 2003 Mr Besson wrote to Mr and Mrs Henke to set out figures based on Mr Catley’s opinion of the open market value of the property remaining after the disposals of Plot 1 and Plot 2, and Mr Catley’s opinion as to the apportionment of sales proceeds between exempt and non-exempt areas. The letter also contained Mr Besson’s computations of the chargeable gains arising on the sales of Plot 1 and Plot 2. In these computations, the amount of the principal private residence exemption was reduced by a fraction of which the numerator was the time from the building of Old Oak House and the denominator was the total period of ownership of the original plot. For the disposal on 18 October 1999, the computed gain was £120,899, split equally between Mr and Mrs Henke. For the disposal on 15 March 2001, the computed gain was £151, 392, again split equally.
25.	On 28 October 2003 Mr Besson wrote separately to each of Mr and Mrs Henke indicating that he had completed his enquiry into their Form R40 for 1999/00 and the accompanying schedules. He enclosed Notices of Assessment (issued separately to Mr and Mrs Henke) for the year ended 5 April 2000, each showing assessable capital gains of £60,449 on the disposal of Plot 1 and tax payable of £18,579.60.
26.	On the same date Mr Besson wrote separately to each of Mr and Mrs Henke indicating that he had completed his enquiries into the tax returns for the year ended 5 April 2001. He concluded that a chargeable gain arose on the sale of land at Old Oak House [ie Plot 2], as principal private residence relief did not cover the whole of the gain. For Mr Henke, the amendment to his return resulted in an increase in tax due of £24,910.80, with an amended self assessment of £24,258.80 tax due. For Mrs Henke, the amendment resulted in an increase in tax due of £24,446.40, with and amended self assessment of £23,794.40 tax due.
27.	On 18 November 2003 Mr and Mrs Henke appealed against the notices of assessment for 1999-00 and the enquiry conclusions for 2000-01.
28.	I consider Mr Catley’s Expert Report and his further evidence below, after referring to the contentions of the parties.
Arguments for Mr and Mrs Henke
29.	Mr Henke’s arguments did not coincide exactly with the list of issues set out at paragraph 1 above, but it is convenient to analyse them in that order, subject to amalgamating the first two issues.
Validity of assessments for 1999-2000 and enquiry for 2000-01
30.	Although it was not until the end of his submissions that Mr Henke dealt with the questions of the validity of the assessments made for 1999-2000 and of the validity of the enquiry procedure in relation to 2000-01, it is easier to deal with these at the initial stage. This is because defects might have the result of invalidating the assessments and the enquiry, thus rendering them ineffective, and making the remaining subject matter of the appeal irrelevant.
31.	Mr Henke submitted that the full extent of the capital gains had been declared on the SA108 forms for both the tax years and submitted in time to HMRC. There had been no amendment to these figures [ie the disposal proceeds]. The figures had been submitted in the manner advised by Mrs King of HMRC’s Huntingdon Tax Office. Section 9A(1) of the Taxes Management Act 1970 (“TMA 1970”) contained a requirement that prior notice should be given to the taxpayer before an enquiry was begun. This prior notice had not been given in relation to the enquiry for 1999-2000. HMRC had admitted their mistake in this respect. Well before the formal notice of enquiry relating to Plot 2 given on 4 February 2003, there had been a “fusion” of the enquiries for the two years.
32.	The R40 returns fulfilled s 8 TMA 1970, and the SA108 returns fulfilled s 7(1). The manner of presentation within the SA108 forms had been advised by HMRC Huntingdon and condoned by HMRC’s Bootle office through their acceptance of the forms for 1999-2000 and Mr Besson’s reference in his letter dated 8 January 2002 to “your Tax Return/Claim”. The self assessment forms for 2000-01 were merely a duplication of the information already declared on the R40 and SA108 forms for that year. The letters of intention to start the enquiry on Plot 2 were sent after the enquiry was already being conducted.
33.	Mr Henke stated that the Huntingdon office had advised him and Mrs Henke that they did not need to respond to the letter from HMRC’s Bootle office dated 4 September 2000 requesting further information. They both felt that there had been injustice in the way that the matter had been handled. A letter dated 12 March 2002 to their Member of Parliament written by Mr Richard Cooke, HMRC’s Regional Director for Northern England, contained the following paragraph:
“We needed to ask Mr and Mrs Henke for more information before we could accept the claim. We wrote to Mr Henke in September 2000. We should have told Mr and Mrs Henke that we were making an enquiry into their claim and sent them our Code of Practice on enquiries. We have apologised to Mr and Mrs Henke for this and paid them compensation. We are, however, entitled to carry out our enquiry.”
34.	Mr Henke questioned why a procedure existed if it did not have to be followed. The compensation had not been accepted. The enquiry had taken place without full trust and faith.
Costs allowable against sales proceeds
35.	Mr Henke contended that the relevant asset to be taken into account on the disposal was the entire asset owned at the moment of disposal and not just the part which was to become the property of the third party new owners. Section 42(2) TCGA 1992 required allowable costs to correlate with the basis of apportionment; as A + B in the fraction represented the total sales value of the whole property, the corresponding allowable cost should also be inclusive of the entire property.
36.	He argued that paragraph 9 Schedule 2 TCGA 1992 imported into the capital gains legislation the whole effect of the Town and Country Planning Act 1990 (“TCPA 1990”). That Act was the fundamental authority in defining “planning permission”. The interest in land owned by the Henkes was “land reflecting development value” within Part II of Schedule 2 TCGA 1992. The definitions in paragraphs 10 and 14 of that Schedule were relevant to both disposals. Planning permission enured for the benefit of the land; the main contract cost of £238,537 should be recognised as the basis for applying s 42(2) TCGA 1992. Section 42 required a sale figure to be established and therefore could not be applied until after the disposal took place, whereas s 38 could only include items spent up to the moment prior to disposal and was therefore established prior to disposal and not after disposal.
37.	For valuation of an interest in land on a relevant date (ie Plot 2 on 15 October 1999) there must be legal existence of that interest and in the absence of disposal on that same date, open market value should be based on the manner in which that land was used on the date of valuation, provided it lay within the scope authorised by TCPA 1990. On the date of disposal of Plot 1 the residual asset had only comprised the dwelling-house set in approximately 2.12 acres of land as its garden, and there was no obligation to divide further.
The permitted area
38.	Mr Henke argued that Old Oak House did justify a permitted area of 2.66 acres, representing the total area of the interest in land when the house had been designed and built in June 1993. The planning permission had specified that only one house could be built. The intention of s 222(1)(a) was that the permitted area was to be set by considering the historic facts of the dwelling-house, as opposed to the more limited land requirement test at the date of disposal. Mr Henke presented information enabling judgment to be made of surrounding properties at the time when Old Oak House had been built. Even though some land had now been sold as a result of the two part disposals, the plans still provided evidence of acceptance by the local planning authority that the size and character of the house was consistent with a property of 2.66 acres in the village of Houghton; no changes in structure had been effected since the house had been built. He referred to Varty v Lynes 51 TC 419 (also reported at [1976] STC 508) and Longson v Baker [2001] STC 6.
The period of ownership
39.	Mr Henke argued that the adjustment based on a time prior to completion of the dwelling-house was inconsistent with the requirements of s 222(1)(a) and (b) TCGA 1992 and the planning permission. Sub-section (1)(a), Varty v Lynes, and the HMRC Capital Gains Manual CG64377-64378 all specified that the land test for a private residence relief claim needed consideration only at the time or moment of disposal. The time test for the dwelling-house was conditional on both ownership and residency (ie the use of the dwelling-house). He challenged HMRC on the basis that an ownership/residency event which did not happen until June 1993 was incorrectly applied to August 1982 (when land was purchased without the house), and the Henkes had chosen to leave the land fallow until they were ready to build. Their right to do this was claimed through s 57(2) TCPA 1990. Mr Henke asked for a finding that the downward adjustment of principal private residence relief due to the purchase of land having preceded the Henkes’ occupation of the dwelling-house should be disallowed.
Arguments for HMRC
40.	Mr Kelly dealt with each of the five issues listed at paragraph 1 above in turn. He argued that the burden of proof lay on Mr and Mrs Henke; the standard of proof was the normal civil “balance of probabilities” (Cross J in Amis v Colls, 39 TC 148 at 161).
Validity of the 1999-2000 assessments
41.	Self assessment returns had not been issued to or completed by the Henkes for that year. They had completed and submitted Forms R40. They had submitted Forms SA108. Form SA108 was the supplementary Capital Gains pages to a self assessment return. The Capital Gains box on the Forms R40 had been ticked, but no Forms R40(CG) had been issued or completed.
42.	Two questions arose: (1) Was there a valid enquiry into Mr and Mrs Henke’s 1999-2000 claims? (2) Did Mr and Mrs Henke make a return for the year 1999-2000?
43.	Mr Kelly was not convinced that the question whether or not there was a valid enquiry into the Henke’s claims for 1999-2000 was of much relevance. It was admitted that no formal notice opening an enquiry had been issued under paragraph 5(1) of Schedule 1A TMA 1970. The letter dated 25 July 2001 from Mr Quayle of the Bootle office (see paragraph 13 above) had expressed the view that a valid enquiry under Schedule 1A TMA 1970 was in existence. However, Mr Kelly thought that Mr Quayle had misunderstood the position, in making a reference to a claim for relief under s 222 TCGA 1992; relief under ss 222-226 TCGA 1992 did not have to be claimed. When writing to Mr and Mrs Henke on 28 October 2003, Mr Besson had said that he had completed his enquiry into the Henkes’ 1999-2000 claims and concluded that a chargeable capital gain arose. These letters had purported to be formal closure notices under paragraph 7 of Schedule 1A TMA 1970. Mr Kelly argued that the language of paragraph 7 allowed for an enquiry to be closed only by reference to the claim under enquiry (paragraph 7(2) and (3)). He did not think that the conclusion that Mr Besson had reached, that there was a liability to capital gains tax, was a valid closure of a Schedule 1A enquiry, if indeed one existed in the absence of a proper opening notice under paragraph 5(1).
44.	Mr Kelly contended that the question to be determined was not whether there was a valid enquiry into a claim under Schedule 1A TMA 1970 but whether what he referred to as the discovery assessments raised on 28 October 2003 were validly made. He argued that since the introduction of self assessment the only authority for raising an assessment had been s 29 TMA 1970. The Crown contended that HMRC were authorised to raise the assessments in question because Mr Besson, as an officer of the Board, had discovered that chargeable gains which ought to have been assessed had not been assessed and the assessments were necessary to bring into charge the tax lost to the Crown.
45.	On the question whether Mr and Mrs Henke did make a return for 1999-2000, Mr Kelly referred to my decision in Osborne v Dickinson [2004] STC (SCD) 104. In the light of the view at paragraph 28 of that decision that neither a Form R40 nor the SA108 supplementary Capital Gains pages on their own constituted a return under s 8 TMA 1970, Mr Kelly argued that Mr and Mrs Henke had not made a return for 1999-2000.
46.	As there had been no return, any tax due fell to be dealt with by assessment. By the time the discovery assessments were raised in October 2003, HMRC had been of the clear view that the sale of Plot 1 gave rise to a substantial CGT liability. Assessments had therefore been raised on the basis of a “discovery” under s 29(1)(a) TMA 1970. “Discover” simply meant “find out” (ex parte Aramayo, 6 TC 279), and although legal evidence was not required, the Inspector [officer of the Board] had to be acting reasonably (ex parte Hooper, 7 TC 59). There might be some doubt as to whether Mr and Mrs Henke were, in the absence of an enquiry into a self assessment return, under a legal obligation to provide information about the disposal of Plot 1, or whether that information was provided voluntarily. However, by October 2003 Mr Besson had clearly “discovered” that there was a potential liability to capital gains tax, and he had acted reasonably in raising the assessments based on his computation of the gain. These computations had been handed to Mr Henke during a meeting on 7 October 2003. Mr Kelly asked for a ruling that the discovery assessments raised on 28 October 2003 had been validly made.
Validity of the enquiry into the 2000-01 returns
47.	Mr Kelly pointed out that there was no dispute that self assessment returns for 2000-01, including supplementary pages SA108 relating to the sale of Plot 2, had been submitted by Mr and Mrs Henke on 9 December 2002. An enquiry notice into those returns had been issued on 4 February 2003, together with leaflet COP11. This had been well within the enquiry window which closed on “the quarter day next following the first anniversary of the day on which the return was delivered” (s 9A(2)(b) TMA 1970), ie 31 January 2004. The enquiry had been concluded by notices dated 28 October 2003 and Mr and Mrs Henke had appealed against the conclusion in the notices that a chargeable gain arose on the disposal of land at Old Oak House.
48.	As the forms SA108 had been submitted in January 2002 there might have been some discussion about the sale of Plot 2 in advance of the enquiry being opened in February 2003. Mr Kelly maintained that there was no evidence to suggest that the enquiry had not been properly opened, conducted and closed. He asked for a determination that the amendments to Mr and Mrs Henke’s returns on the conclusion of the enquiry had been validly made.
Costs allowable against sales proceeds
49.	Mr Kelly referred to the suggestion that HMRC might not accept that the Henkes owned one asset, being the land and the buildings erected on that land. With reference to s 288(1) TCGA 1992 the Crown did accept that the land and the buildings upon it formed a single asset. In the Crown’s view there had been two separate part disposals of that single asset, but it was no part of the Crown’s case that the land and buildings should at any time be regarded as anything but a single asset.
50.	Mr Kelly argued that Schedule 2 TCGA 1992 was of no application in the present case. The Schedule was headed “Assets held on 6th April 1965”.Although not conclusive, this suggested that the Schedule might only apply to assets held on that date. Here the land had not been acquired until August 1982.
51.	The purpose of Schedule 2 was broadly to deal with certain cases where a time-apportionment on assets owned at the date of commencement of capital gains tax would have been unfair; one of these classes of asset was land with development value. The special rule provided for a 6 April 1965 valuation assuming a sale and an immediate reacquisition of the asset at that valuation on that date. Mr Henke was incorrect in assuming that, as the land at Houghton had development value, the Schedule 2 valuation rules could be applied. Mr Kelly referred to the wording of paragraph 9 and Mr Henke’s construction of it; even if this were to be correct, the result would be to give a 6 April 1965 valuation, with no application to assets acquired after that date. In addition, Schedule 2 was applied by s 35 TCGA 1992, which stated that Schedule 2 had effect in relation to disposals of assets owned on 6 April 1965. As Schedule 2 did not apply, it followed that the use by Mr Henke of the special valuation rules contained in Schedule 2 relating to land with development value should be disregarded.
52.	Although both planning permission and TCPA 1992 were mentioned in Schedule 2 TCGA 1992, Mr Kelly had already put the Crown’s view that Schedule 2 did not apply. The planning permission attaching at various times to the Henkes’ land might be a factor in arriving at the value of that land at a particular date. If the valuations were disputed, the Lands Tribunal had jurisdiction to determine the matter. The Crown’s case was that nothing in TCGA 1992 brought into play TCPA 1990 in computing the gains in the present case; consequently, Mr Henke’s arguments based on planning permission and the provisions of TCPA 1990 should be disregarded.
53.	In relation to deductions and the part disposal rules, a chargeable gain was computed by deducting from the sale proceeds only those deductions authorised by s 38 TCGA 1992. There were three categories of allowable deductions: acquisition costs, enhancement costs, and the incidental costs of disposal. Under s 21(2)(a), disposal of an asset included a part disposal. Section 42 provided rules for apportioning expenditure under s 38(1)(a) and (b) between the part of the asset disposed of and the part remaining. Under s 42(4), any expenditure which was, on the facts, wholly attributable to what was disposed of or what remained undisposed of did not need to be apportioned.
54.	Mr Kelly argued that the important point of principle to be established was that no part of the cost of building Old Oak House could be apportioned to Plot 1 or Plot 2. The cost of building Old Oak House was expenditure wholly attributable to the part of the asset remaining. Put another way, the cost of building Old Oak House was not reflected in the plots sold. This was a matter of common sense.
55.	Mr Kelly admitted that at a meeting at Huntingdon Tax Office on 9 December 2002 the Henkes were told that the cost of building Old Oak House (which they had previously not included as a deduction in computing their gains from the sales of Plot 1 and Plot 2) could be apportioned to those plots. The Crown’s case was that this view was mistaken, and was corrected by Mr Besson in his letter dated 13 January 2003. It was unfortunate that the Henkes were given misleading information concerning the way in which HMRC considered the gains were to be computed. Mr Kelly apologised for this. However, the view expressed on 9 December 2002 could in no way be regarded as binding and the mistake had been spotted and corrected in writing reasonably quickly.
56.	Mr Kelly then considered which expenditure fell on the facts to be apportioned under s 42 TCGA 1992. These items are considered below.
The permitted area
57.	Mr Kelly accepted that Old Oak House had been Mr and Mrs Henke’s only residence since they first moved into the property in June 1993. On the question of the permitted area, Mr Kelly referred to ss 222-226 TCGA 1992. Section 222(1)(b) applied s 222 to the disposal of land “which he has for his own occupation and enjoyment with that residence as its garden or grounds up to the permitted area”. Section 222(2) defined the normal permitted area as 0.5 of a hectare. By s 222(3), “Where the area required for the reasonable enjoyment of the dwelling-house . . . as a residence, having regard to the size and character of the dwelling-house, is larger than 0.5 of a hectare, that larger area shall be the permitted area.” The amount of relief was determined by s 223.
58.	The Crown’s case was that the permitted area was only 0.82 of a hectare (2.03 acres) at the date of each part-disposal. Under s 222(2) TCGA 1992 the permitted area included the site of the dwelling-house. It was accepted that the entity of the dwelling-house included the garage, situated a little way from the main house.
59.	The permitted area test in s 222(3) was objective rather than subjective; the needs of a particular owner and the use to which he happened to put a garden and grounds were irrelevant. The objective nature of the test was illustrated by Longson v Baker, in which Evans-Lombe J had emphasised this. Mr Kelly contended that the permitted area test was a question of fact capable of being tested and determined objectively in the light of the character and location of the dwelling-house as a residence and not taking into account the subjective wishes of particular occupants with regard to the amount of land that they required.
60.	The word “has” in s 222(1)(b) TCGA 1992 did not imply “or has at any time”. This meant that the permitted area test was to be applied by reference to what was required in the circumstances prevailing at the time of the disposal. What might have been required at some other time was irrelevant. In Varty v Lynes, Brightman J had contrasted the former provision corresponding to s 222(1)(a) with that corresponding to s 222(1)(b). The former was looking both to the present and the past, while the latter was looking only to the present.
61.	He submitted that Mr Henke’s interpretation of Varty v Lynes was a little misguided. Section 222(1)(a) meant that a residence that had been an individual’s dwelling-house at any time in his period of ownership was prima facie within the scope of the relief. However, this did not justify looking at the whole planning permission and other history of the residence when either deciding what the permitted area was (which as stated was a test at the time of disposal) or when looking at the amount of relief due, which was governed by s 223. The Crown’s view was that there were two distinct tests for a house and a garden. In relation to a house, the test for only or main residence was “at any time”. For land, the test was whether it was garden or grounds at the time of disposal. If a house ceased to be an only or main residence, the garden would not qualify. If both house and garden met the respective tests at the time of disposal, the grounds would qualify whatever their previous use. This was all that s 222(1)(a) and (b) determined.
62.	It was not correct in considering the permitted area in the case of Old Oak House to make comparisons with the permitted area in decided cases such as Longson v Baker. The most meaningful comparables were those relating to similar properties in the immediate vicinity of Old Oak House. In Marson v Morton 59 TC 381, [1986] STC 463, Sir Nicholas Browne-Wilkinson VC had criticised the process of comparing the facts of other decided cases.
63.	The permitted area test was a test of what was “required” for the reasonable enjoyment of the dwelling-house as a residence. Although there was no direct judicial guidance, it was thought that the corresponding legislative context made the compulsory purchase case of In re Newhill Compulsory Purchase Order 1937, Payne’s Application [1938] 2 All ER 163 useful guidance on the meaning of the word `required’.  Du Parcq LJ said at p 167C:
“’Required’, I think, in this section does not mean merely that the occupiers of the house would like to have it, or that they would miss it if they lost it, or that anyone proposing to buy the house would think less of the house without it than he would if it was preserved to it.  ‘Required’ means, I suppose, that without it there will be such a substantial deprivation of amenities or convenience that a real injury would be done to the property owner.”
64.	In Longson v Baker, Evans-Lombe J had confirmed the use of these comments in relation to permitted area disputes. Mr Kelly submitted that the best way of deciding what land was “required” at the date of a disposal was to look at the amount of land held with comparable sized properties in the area at that date. This required expert evidence [considered below].
65.	On the basis of the expert evidence and the Crown’s arguments regarding the factors to be considered when determining the permitted area, Mr Kelly asked for a determination that the permitted area after each disposal was 0.82 of a hectare. He also asked for a determination that the location of the permitted area at the time of Plot 1 should be that area edged red at Plan DV4A in Mr Catley’s proof of evidence, and that the location of the permitted area at the time of the sale of Plot 2 should be that edged red at plan DV4B in Mr Catley’s proof of evidence.
66.	If the Crown’s submission on the permitted area succeeded, there remained the question of how the sale proceeds should be apportioned between the permitted and non-permitted areas. The authority for apportionment was in s 222(10) TCGA 1992. By virtue of s 52(4) TMA 1970, the basis for apportionment was “just and reasonable”. As such an apportionment required consideration of the value of land, in the absence of agreement the matter would have to be referred to the Lands Tribunal.
The period of ownership
67.	The question was whether private residence relief needed to be apportioned to exclude relief for the period before Old Oak House became Mr and Mrs Henke’s residence. Surprisingly, this question was not as straightforward as might be expected. It seemed to be very much a matter of common sense that one could not have the relief for a period before a residence was built; a purposive construction of the legislation was necessary to avoid an absurd result.
68.	The problem arose because s 223(1) provided: “No part of a gain to which s 222 applies shall be a chargeable gain if the dwelling-house . . . has been the individual’s only or main residence throughout the period of ownership . . . ” Mr Henke’s argument, as Mr Kelly understood it, was that as Old Oak House only came into existence in 1993, and was occupied as his residence immediately on completion, it had been his only or main residence “throughout the period of ownership”; consequently no part of the gain covered by the relief (ie the gain arising on the sale of land within the permitted area) was a chargeable gain.
69.	The Crown referred to s 223(2) and contended that the gain needed to be apportioned on a time basis to exclude the period between August 1982 (acquisition) and June 1993 (commencement of residence). This was because the period of ownership began with the acquisition of the land and not the date when the house was completed. To derive the meaning of “period of ownership” just from the wording of s 223(1) was too narrow a construction.
70.	It had been agreed that there was only one asset, namely the land and any buildings on that land. For capital gains tax purposes, the date on which that asset was acquired was determined by s 28 TCGA 1992 as the time of contract, which was August 1982. A dwelling-house was not a separate asset which could be “owned”, so when TCGA 1992 spoke of “period of ownership” it meant period of ownership of the asset in question, which here was the land. Consequently s 223(1) did not apply because Old Oak House was not the Henkes’ residence throughout the period of ownership of the land and relief fell to be time apportioned under s 223(2).
71.	The Crown had interpreted “period of ownership” in this way since the introduction of capital gains tax in 1965, and if Mr Henke’s view was determined to be correct, this would mean that TCGA 1992 was seriously flawed. Various arguments could be put in support of the Crown’s view:
(1)	Extra Statutory Concession D49 referred to the case of an individual acquiring land on which he had a house built which he then used as his only or main residence. Such an individual was allowed a period of twelve months (longer in some cases) without having to lose relief. If Mr Henke’s interpretation of the “period of ownership” was correct, this Concession would be completely redundant;
(2)	Section 222(7) defined the period of ownership, in a case where an individual had had different interests at different times, as beginning with the first acquisition giving rise to allowable expenditure for capital gains tax purposes. (The sub-section did not apply to the Henkes, as they had only ever had one interest in the land at Houghton.) If an individual who had bought a leasehold interest in some bare land later purchased the freehold, retained it for a number of years and then built a house, he would have had different interests in the land at different times so that the sub-section would apply. That defined the start of the period of ownership by reference to the time of purchase of the leasehold interest, taking into account the cost of acquisition. On Mr Henke’s interpretation the individual’s period of ownership would begin when the house was completed. This absurd result would be avoided by accepting the Crown’s interpretation of “period of ownership”.
(3)	If Mr Henke’s view prevailed, then in any case where land was purchased, held for a time, built on and the house occupied as the only or main residence, the pre-build gain would (subject to any permitted area considerations) be covered by private residence relief. Mr Kelly found it hard to accept that this result had been the intention of Parliament.
(4)	It would be rather odd if Mr and Mrs Henke could obtain private residence relief to cover the gain arising on the land during a time when they were not only resident elsewhere but also able to claim private residence relief in respect of the two homes which they sold before moving into Old Oak House. This result would go against the principle of an individual only being able to have one “only or main residence” at one time.
72.	Mr Henke had referred to the wording of HMRC’s Capital Gains Helpsheet IR283, referring to the period of ownership beginning on the date the taxpayer first acquired the dwelling-house. Mr Kelly argued that the guidance was merely introductory and thus incomplete, and had no binding authority.
73.	On the wording of the legislation, Mr Kelly accepted that in s 223(1) TCGA 1992, and in s 222(1)(a) where the term “period of ownership” first appeared within these provisions, it seemed at first blush as if the reference was to the ownership of the relevant dwelling-house and not the underlying asset, namely the land. However, he urged me to favour the Crown’s interpretation that the term “period of ownership” related to the asset (the land) and not the dwelling-house. This interpretation could be justified by both looking at the context in which the words appeared and, to avoid absurd or mischievous results, adopting a purposive approach to interpretation. If the Crown’s interpretation was accepted, it followed that private residence relief had to be restricted on a time basis, in accordance with s 223(2), to eliminate relief for the gain arising before Mr and Mrs Henke occupied Old Oak House.
The form of computations
74.	Mr Kelly pointed out that although it was not possible to ask for a determination of the appeals in terms of figures, he was anxious to limit the scope for further disagreement. In the event of my finding in whole or in part in favour of the Crown, he requested that I should approve a basic structure for the computations. As this depends upon the conclusions that I reach on all the issues, I defer consideration of this question until I have set out my conclusions on the other matters raised.
Discussion and conclusions
75.	I deal in the same order with the issues set out at paragraph 1 above.
Validity of the 1999-2000 assessments
76.	Various officers of HMRC involved in this case have failed to deal with matters properly, leading to a tangled web of mistakes that is extremely difficult to unravel. The initial error was the failure to respond to the indication in Box B of the Forms R40 that Mr and Mrs Henke had disposed of assets for more than double the annual exempt amount. The purpose of the notification is to ensure that capital gains are taken into account in establishing whether the amount of tax reclaimed by the Form R40 needs to be adjusted to allow for any liability to tax on those capital gains.
77.	Mr and Mrs Henke tried to deal with the absence of any response by referring the matter to the Huntingdon Tax Office. This led to them being advised to notify details of the gains by means of completing the SA108 pages. The proper course for HMRC would have been to respond to the ticking of Box B in the Forms R40 by sending Mr and Mrs Henke Forms R40(CG) for each of them to complete. The Bootle office could then have decided, in the light of the information in those further forms, whether the potential capital gains tax liability should be dealt with by simply adjusting the repayment claim, or by issuing self assessment return forms for Mr and Mrs Henke to complete in order to report in detail the circumstances in which the gains were made.
78.	The circumstances of Mr and Mrs Henke are very similar to those of the taxpayer in Osborne v Dickinson. In that case the taxpayer had provided details of gains by supplying a computation with a Form CG34 requesting a post-transaction valuation check. She subsequently completed a Form R40 to reclaim tax. At a later stage she completed and submitted Form SA108 setting out details of the gains which she had made for the relevant year. There were two main differences between her case and that of the Henkes. The first was that Miss Osborne decided, on advice from her brother, a practising accountant, not to tick the capital gains box on the Form R40 because details of her gains had already been notified on Form CG34. The second was that she sent in the completed Form SA108 at a point falling after the expiry of the time limit within which a self assessment of the tax due should have been submitted. The Henkes did indicate that they had made capital gains for the year, but the Forms R40 did not permit them to give any further details. They sent in Forms SA108 in order to provide information to HMRC; this they decided to do within less than five months after the end of the year of assessment, because there had been no response to the generalised notification of capital gains disposals on the Forms R40.
79.	Mr Henke’s argument before me was based on the underlying assumption that he and Mrs Henke had completed tax returns for the year 1999-2000. Section 9A TMA 1970, on which he relied, concerns enquiries into returns under ss 8 and 8A (the latter not being relevant in the present case).
80.	For the reasons that I set out in Osborne v Dickinson, I do not consider that Form R40 is a “return” (see paragraph 26 of that decision). Similarly, merely submitting the Form SA108 Capital Gains pages does not amount to a return; see paragraph 28 of that decision. Thus I do not consider that Mr and Mrs Henke did submit returns for the year 1999-2000. It follows that s 9A TMA 1970 did not apply to them for that year. It also follows that Leaflet COP11 did not apply in relation to that year.
81.	Mr Kelly admitted (see paragraph 43 above) that no formal notice opening a formal enquiry had been issued under paragraph 5(1) Schedule 1A TMA 1970. He also considered that Mr Quayle had misunderstood the position by referring to the Henkes’ claim for relief under s 222 TCGA 1992. As the correspondence was continued on what appeared to be an assumption that there was an enquiry under Schedule 1A, I am not prepared simply to accept these contentions without testing them.
82.	Schedule 1A TMA 1970 relates to claims not included in returns. I have already decided that Mr and Mrs Henke did not submit returns for 1999-2000. What they did do was to submit Forms R40 claiming repayment of tax, and indicating that they had disposed of assets for more than double the capital gains tax annual exempt amount. The review of their tax affairs was commenced as a result of the repayment claims having been made (and as a result of the omission of HMRC’s Bootle office to deal with the matter properly by issuing Forms R40(CG) for the Henkes to complete). Although Mr Quayle referred to “your claim for relief under section 222 TCGA 1992”, this appears to have been in response to a point contained in a letter from Mr Henke dated 5 June 2001 (not included in the papers before me). I interpret the position as involving an enquiry into the Henkes’ tax affairs as a result of the claims made in the Forms R40 and the information subsequently provided by them (in the SA108 pages) as to their capital gains disposals. Thus the enquiry was into the R40 repayment claims, and the implications for these of the capital gains which HMRC considered the Henkes to have made. I do not read the correspondence generally as relating to a “claim” for relief under s 222 TCGA 1992. I agree that the latter relief does not have to be the subject of a claim.
83.	Under paragraph 5(1) of Schedule 1A TMA 1970 an officer of the Board may enquire into a claim made by any person if, before the end of a specified period, he gives notice in writing of his intention to do so to that person. The relevant period for a claim relating to a year of assessment is that ending with the first anniversary of the 31 January next following that year. Thus for 1999-2000 the period expired on 31 January 2002.
84.	Mr Quayle’s letter referring to the enquiry for that year was written on 25 July 2001. It is not clear from that letter when the subject of compensation for mistakes had first been raised, or what references there may have been in earlier correspondence to the subject of an enquiry. (Despite the considerable amount of documentation provided to me, there is not a full file of all the correspondence between the Henkes and HMRC, although Mr Henke has set out a list of the correspondence in one of the Appendices to his 2004 Report.) A question of interpretation arises in relation to paragraph 5(1) of Schedule 1A TMA 1970; can it be construed as permitting an enquiry where written notice of the enquiry is not given until after it has commenced, but is given before the expiry of the statutory notice period?
85.	Although the wording of paragraph 5(1) is capable of such a construction, I consider it to be a “stretched” construction, as well as unattractive in relation to the statutory scheme for enquiries. The taxpayer needs to be informed that his tax affairs are under review, to be able to consider how best to respond to any questions, and where appropriate to obtain professional representation. These objectives would be consistent with the comments in COP11 relating to enquiries into returns (which are not directly relevant here, for the reasons given above). If paragraph 5(1) is construed as permitting a retrospective validation of an enquiry by giving notice at some time after it has begun, this would frustrate those objectives and put taxpayers at a considerable disadvantage. Therefore the construction that I place on paragraph 5(1) is that it imposes the requirement of prior notice as a precondition to making an enquiry into a claim.
86.	This leads on to the status of the assessments issued following the purported enquiry into the claim. Is the failure to give notice at the commencement of the enquiry a basis for treating those assessments as not being valid? In his letters dated 28 October 2003 enclosing the assessments and headed “Paragraph 7(1), (2) and (3) of Schedule 1A Taxes Management Act 1970”, Mr Besson said:
“I have now completed my enquiry into your form R40 for 1999/00 and the accompanying schedules containing details of a disposal of land at Old Oak House. I have concluded that a chargeable Capital Gain arises on the disposal of this land, since the whole of the gain is not covered by Principal Private Residence Relief. I intend to make an assessment* [*attached] to recover the tax due.”
87.	Where an enquiry is completed by issue of a closure notice under paragraph 7 of Schedule 1A TMA 1970, the closure notice must, if in the officer’s opinion the claim is insufficient or excessive, amend the claim so as to make good the deficiency or excess. Under paragraph 8(1) effect is to be given to such amendment by making such adjustment as may be necessary; where appropriate this is to be by way of assessment on the claimant. I read these provisions as at maximum allowing an assessment in the amount of the claim. Thus if tax has been claimed by way of a Form R40 and it is established that the taxpayer has other income or gains of an amount meaning that the R40 claim should not have been made, the maximum assessment under paragraph 8(1) would be in an amount equal to the R40 repayment claim.
88.	It follows that there may have been more than one error with the procedure leading to the assessments. The first was that notice of enquiry was not given before commencement of the enquiry. The second potential error was that the making of an assessment under paragraph 8(1) of Schedule TMA 1970 (if that is what the assessment purported to be) was not an appropriate way of dealing with the capital gains, as these were substantially in excess of the tax reclaimed otherwise than by way of a return.
89.	If the assessments cannot be considered to have been appropriately raised under paragraph 8(1) of Schedule 1A, is there any other basis on which they can be held to be valid? Mr Kelly argued that these were “discovery” assessments under s 29 TMA 1970. Clearly Mr Besson’s letters dated 28 October 2003 did not describe them as such (nor as made under paragraph 8(1) of Schedule 1A). As the heading of his letter referred to paragraph 7 of Schedule 1A, it can be regarded simply as setting out details of the closure of the enquiry. In the absence of a specific description, the assessments fall to be tested on the basis of the applicable legislation, irrespective of whether the letters enclosing those assessments could be said to be misleading. The notices of assessment did not specify the basis on which they had been made; they simply set out the amounts of tax due, with calculations showing the rates of tax on the gains and the total tax due.
90.	Mr Kelly had stated in argument that since the introduction of self assessment, the only authority for raising an assessment had been s 29 TMA 1970. As I have already indicated, this is not wholly correct, as an assessment can be made under paragraph 8 of Schedule 1A TMA 1970. However, I accept that s 29 is now the major basis for raising assessments.
91.	I have already found that Mr and Mrs Henke did not make “returns” for 1999-2000 (whatever they thought the Forms R40 and SA108 to be). As in Osborne v Dickinson, in the absence of a return s 29(1) permits an assessment to be made without the need to consider s 29(2) or (3) (see paragraph 29 of my decision in that case). It is simply necessary for an officer of the Board to “discover” that (in this case) chargeable gains which ought to have been assessed to capital gains tax have not been assessed. If this precondition is met, the officer may make an assessment in the amount which ought in his opinion to be charged in order to make good the loss of tax. I find that Mr Besson did “discover” that the capital gains had not been assessed. Although the correspondence did not refer to the assessments as discovery assessments, nor did they refer to the loss of tax, I consider that they were properly made pursuant to s 29 TMA 1970, and were therefore valid discovery assessments.
92.	In arriving at this conclusion, I must express concern at the unsatisfactory way in which HMRC dealt with the whole subject of the 1999-2000 capital gains. Forms R40 are not suitable for taxpayers with more substantial capital gains; this is illustrated both by this case and by Osborne v Dickinson. If a taxpayer has made capital gains in excess of the amount of income in respect of which he or she would normally make a repayment claim, it is wholly inappropriate for a Form R40 to be used; there is no point in reclaiming tax on income if the eventual liability to tax on capital gains is going to be greater. HMRC need to be vigilant in reviewing the indications on Forms R40 that capital gains have arisen for the year in question. Where the taxpayer has ticked the relevant box, this should result in an immediate request for further information. If the gain is likely to be substantial, the proper course will be to issue a self assessment return to the taxpayer, rather than attempting to deal with the matter by using Form R40(CG). The latter form is only suitable for minor gains that reduce, but do not eliminate, the repayment claim.
93.	If self assessment return forms had been issued to the Henkes for 1999-2000, they could have provided the information to HMRC in the normal way on Forms SA108 as part of those returns, and a proper enquiry into those returns could have been commenced, with notice being given at the appropriate time. In my view, HMRC should instruct their officers not to issue or accept Forms SA108 without the full self assessment return. This case and Osborne v Dickinson illustrate the difficulties caused by failing to follow the proper procedure. Such failures should never be allowed to recur.
94.	I also consider it unsatisfactory that the assessments were not described in the correspondence as discovery assessments. Taxpayers should be told the reasons for the making of assessments, even if, as I have found, the strict statutory position is that the omission of the description does not invalidate such an assessment.
Validity of the enquiry into the 2000-01 returns
95.	It follows from the conclusions that I have already reached in respect of 1999-2000 that I do not consider the Forms R40 and the accompanying SA108 pages for 2000-01 to have constituted “returns” for that year. Mr and Mrs Henke did not make returns for 2000-01 until 9 December 2002. Notice of the enquiry was issued on 4 February 2003, which was within the enquiry window applying under s 9A(2)(b) TMA 1970. I see no difficulty with the fact that there may have been prior discussions about the disposal; the enquiry can only be into a “return”, and events before the return has been issued cannot be taken into account. The enquiry was properly closed pursuant to s 28A TMA 1970. I therefore determine, as Mr Kelly requested, that the amendments to Mr and Mrs Henke’s returns on the conclusion of the enquiry were validly made.
Costs allowable against sales proceeds
96.	Mr Henke relied on Schedule 2 TCGA 1992 as importing into the capital gains legislation the concepts in TCPA 1990, as well as establishing special valuation rules. I accept Mr Kelly’s arguments that the Schedule does not apply in the present case. In addition to the arguments recorded above, I accept Mr Kelly’s construction of paragraph 9 of Schedule 2. By virtue of paragraph 9(1)(a), Part II of the Schedule only applies to assets owned on 6 April 1965. Mr Henke argued that the word “and” at the end of paragraph 9(1)(a) meant that the Schedule applied if condition (a) was met “and” it also applied if condition (b) was met. The Crown’s view was that Schedule 2 only applied if condition (a) “and” condition (b) were met; this view was consistent with the wider view that the Schedule only applied to assets held on 6 April 1965. Like the Crown, I read the “and” as conjunctive rather than disjunctive. In addition, Mr Kelly made the point that even if it were to be read as disjunctive, the only effect of paragraph 9(2) would be to give a 6 April 1965 valuation, which therefore can have no application to assets acquired after that date.
97.	 Thus Mr Henke’s argument that the planning permission originally granted set the whole original plot as one asset for all time does not succeed; the disposals are to be considered by reference to the specific rules for disposals laid out in TCGA 1992 itself.
98.	The sales of Plot 1 and Plot 2 were each part disposals within s 21(2) TCGA 1992. What the Henkes owned before the disposal of Plot 1 was a single plot of 2.66 acres with two buildings on it, Old Oak House and the garage within its curtilage. Section 21(2)(b) provides:
“there is a part disposal of an asset where an interest or right in or over the asset is created by the disposal, as well as where it subsists before the disposal, and generally, there is a part disposal of an asset where, on a person making a disposal, any description of property derived from the asset remains undisposed of.”
99.	When Plot 1 was sold, an interest or right in that part of the land was created by the disposal; it did not have to exist (or “subsist”) before the disposal. The balance of the original plot remained undisposed of. The position was similar on the later sale of Plot 2, although the amount of the original plot retained by the Henkes was of course smaller. The conditions for a part disposal were clearly met on each occasion.
100.	Section 42 TCGA 1992 governs the attribution and, where appropriate, the apportionment of expenditure in relation to part disposals. Section 42(4) makes it clear that an apportionment is not to be made where on the facts the expenditure is wholly attributable to what is disposed of, or wholly attributable to what remains undisposed of. What this means in the present case is that unless any of the expenditure on building Old Oak House and its garage can be regarded as having been reflected in either or both of Plot 1 and Plot 2, it cannot be taken into account under s 38 TCGA 1992 as an allowable deduction in computing the gains on the sale of those plots.
101.	Mr Kelly referred to this as a common sense view. In support of this argument, let us consider the position of an eventual sale of Old Oak House itself (together with the whole of its remaining plot). If that sale qualified fully for private residence relief, the question of allowable expenditure under s 38 TCGA 1992 would not arise. For the purposes of this hypothesis (and without pre-empting the matters considered later in this decision), let us assume that the sale would not qualify for full relief. Would Mr and Mrs Henke regard it as appropriate in such circumstances to have part of the building expenditure on the house and garage treated as non-deductible because it had been attributed to the previous sales of Plot 1 and Plot 2? Ignoring the cash flow advantage of having taken relief for the relevant part of the expenditure at an earlier stage, the prospect would only be attractive if either a very large proportion of any gain on the sale of Old Oak House did qualify for private residence relief, or if there was a disposal falling within s 62 TCGA 1992 so that no liability arose.
102.	My conclusion is that those building costs are wholly attributable to the asset retained. Mr Kelly suggested that the expenditure listed in the Statement of Facts Not in Dispute should be divided into three categories: (A) costs of acquisition under s 38(1)(a); (B) enhancement costs under s 38(1)(b); (C) incidental disposal costs under s 38(1)(c). For expenses within (A) and (B) he suggested a further sub-categorisation: (i) common costs that may be apportioned under s 42 on the disposal of Plot 1 and Plot 2; (ii) costs relating wholly to the land retained that need not be apportioned under s 42 and which consequently may not be deducted from the sale proceeds of Plot 1 and Plot 2; (iii) costs that relate wholly to the two plots disposed of and which need not be apportioned under s 42 but which may be deducted in full from the sale proceeds of Plot 1 and Plot 2. The incidental costs of disposal under s 38(1) (c) fall to be deducted from the sale proceeds of the relevant plot.
103.	I agree with Mr Kelly’s suggested categorisations. I also agree that Mr Henke’s contention relating to the building costs, that as there is only one asset, these costs are an acquisition cost rather than an enhancement cost, is not correct. The purchase cost plus the incidental costs is the only expenditure falling within s 38(1)(a). The remaining expenditure falls within sub-section (1)(b) or (c).
104.	Where costs fall to be apportioned under s 42 TCGA 1992, this is to be done by reference to the formula in s 42(2), A/(A+B) (brackets inserted for clarity in reproduction). “A” in this formula is the amount or value of the consideration for the disposal, while “B” is the market value, after each part disposal, of the whole part remaining undisposed of. The market value is to be arrived at by reference to s 272(1) TCGA 1992, namely “the price which those assets might reasonably be expected to fetch on a sale in the open market”. No specific rules apply for the valuation of land.
105.	Mr Kelly suggested the following categorisation of costs listed in the Schedule to the Statement of Facts Not in Dispute, but questioned whether a general ruling as to deductibility should be given instead:
(1)	Purchase of plot £20,000 – common acquisition cost: to be apportioned;
(2)	Legal fees £289 – common acquisition cost: to be apportioned;
(3)	Architects’ fees £23,989 – enhancement cost all related to Old Oak House: no apportionment;
(4)	Tree treatment £224 – common enhancement cost: to be apportioned;
(5)	Public utility costs £11,939 – relates only to plots sold: allow 50% to Plot 1, 50% to Plot 2;
(6)	Levelling ground £750 – enhancement cost all related to Old Oak House: no apportionment;
(7)	Legal fees £2,853 – enhancement cost all related to Old Oak House: no apportionment;
(8)	Landscape materials £1,936 – enhancement cost all related to Old Oak House: no apportionment;
(9)	Two marble fireplaces – enhancement cost all related to Old Oak House: no apportionment;
(10)	Kitchen suite £12,500 – enhancement cost all related to Old Oak House: no apportionment;
(11)	Kitchen tiles £1,250 – enhancement cost all related to Old Oak House: no apportionment;
(12)	Soil excavation £2,500 – enhancement cost all related to Old Oak House: no apportionment;
(13)	Retaining brick wall £2,235 – enhancement cost all related to Old Oak House: no apportionment;
(14)	Fencing £1,763 – common enhancement cost: to be apportioned;
(15)	Main house build cost £238,537 – enhancement cost all related to Old Oak House: no apportionment;
(16)	York stone paths £2,458 – enhancement cost all related to Old Oak House: no apportionment;
(17)	Architects’ fees £1,590 – relates only to plots sold: allow 50% to Plot 1, 50% to Plot 2;
(18)	Incidental costs Plot 1 £1,180 – allow against Plot 1;
(19)	Incidental costs Plot 2 £4,885 – allow against Plot 2.
106.	I prefer not to give a generalised ruling. I am concerned to avoid the possibility of further disagreement between the parties. Although these items were not reviewed at the hearing, I can confirm that I agree most of these categorisations. The two needing further consideration are (6) and (7). The description of (6) in the calculations which Mr Henke sent to Mr Besson on 3 May 2003 was: “Jan 96 Levelling ground and making front of garden more accessible and ready for sale”. As this description implies that the work involved two functions, namely work on the garden generally and work facilitating the eventual sale of the two plots, I think that this should be classified as a common enhancement cost, to be apportioned. The description of (7) in those calculations was: “Sep 92 Various professional fees leading to outline planning permission being granted for extra plots per Wilkinson & Butler (Solicitor). Total cost for two plots.” However, as indicated at paragraph 7 above, planning permission for the two houses was not granted until July 1995. I do not consider that the expenditure at (7) can be regarded as allowable against the two plots; it appears to me to relate wholly to Old Oak House, so I accept Mr Kelly’s categorisation for this item. Accordingly, the only item in his list which requires amendment is (6).
107.	Mr Kelly asked for confirmation that all the expenses that may be deducted from the sale proceeds of Plot 1 or Plot 2 will be subject to indexation allowance. I confirm this.
The permitted area
108.	I do not accept Mr Henke’s argument that the permitted area is fixed for all time except where material alterations to the property subsequently take place. Apart from ignoring the planning permissions which subsequently permitted the sales of Plot 1 and Plot 2 followed by the building of the two new houses, this argument stretches logic. Imagine a case in which a very substantial property was built on ten acres of land. On the perhaps somewhat improbable assumption that the whole area of that property was regarded as the permitted area, assume that there is eventually a series of sales of half acre plots, culminating in the original house being left with a plot of two acres. On Mr Henke’s argument, the permitted area would remain ten acres after every sale. Common sense suggests that this cannot be correct.
109.	Further, this argument cannot stand in the light of the wording of s 222(1)(b) (“land which he has for his own occupation and enjoyment with that residence as its garden or grounds up to the permitted area”) and the comments of Brightman J in Varty v Lynes referred to by Mr Kelly. I confirm that the test is to be applied at the time of the disposal, by reference to the use of the verb “has” in the present tense.
110.	As confirmed by Evans-Lombe J in Longson v Baker, the permitted area test is an objective one. I agree with Mr Kelly’s submissions relating to the approach to be taken in applying this test. In argument, and in the course of Mr Catley’s evidence, Mr Henke expressed various opinions concerning the approach. I have to take Mr Henke’s comments as merely opinion, as the only expert evidence was that of Mr Catley.
111.	Rather than recording in detail the evidence given by Mr Catley, I think it appropriate to summarise it. He described the situation in which Old Oak House was located, and gave details of the property. He referred to the history of the case, and to the relevant statutory provisions. He considered the extent of the “garden and grounds” held with comparable properties in the locality. In his view, none of the comparable properties could be regarded as having a restricted plot. This meant that they could all be included within the comparison. Having considered all the comparable properties, his opinion was that at 15 October 1999 and 24 April 2001 the area “required” for Old Oak House was 0.82 hectare. In reviewing the comparable properties, he indicated that Old Oak House was larger than most of those properties and had an imposing and attractive external appearance. For this reason he had allowed a larger proportionate land area. He considered the ratio of built area to plot size. Of the eight properties under review, only two, Old Oak House and The Orchards, had a ratio as high as 1:22.0. He indicated on plan DV4A and DV4B his opinion of the most suitable location of the permitted area at the times of the first and second disposals respectively.
112.	He considered that the area of land claimed by the Henkes as required for Old Oak House was too large. The contention that the entire 1.076 hectares (2.66 acres) was so required did not sit comfortably with the fact that the Henkes, over the years, had reduced the size of the garden successively by selling off not one plot but two. While he considered that 0.5 hectare would be realistic and perfectly adequate for a building of this size and character, he had had regard to properties in the close environs and to the fact that Old Oak House was somewhat more pleasing than other properties surrounding it. However, it was a modern house surrounded by modern houses. He had acceded to 0.82 hectare in a spirit of compromise, to give the maximum benefit of any doubt to the taxpayers. Having regard to the size and character of the dwelling-house in this case, a permitted area of 0.82 hectare (2.03 acres) appeared fair and consistent and was, in his opinion, required for the reasonable enjoyment of Old Oak House at both taxable occasions.
113.	I am satisfied that Mr Catley carried out his review of the “permitted area” question in accordance with the statutory provisions already considered in this decision. Although Mr Henke expressed disagreement with certain aspects of Mr Catley’s evidence, nothing that Mr Henke said amounted to expert evidence, and he did not appoint an expert to give evidence on his behalf. In the absence of anything manifestly wrong with Mr Catley’s expert evidence, I have to take it into account in arriving at my decision. Accordingly, I accept Mr Catley’s conclusion that the permitted area on both occasions was 0.82 hectare (2.03 acres), as indicated on plans DV4A and DV4B.
114.	Mr Henke questioned the accuracy of plan DV4B, having regard to the facts. After the sale of Plot 1, only 2.12 acres had remained. If the recommendation was for a permitted area of 2.03 acres at the time of each sale, this would mean that only 0.9 acre would be left as non exempt area against the size of 0.54 acre for Plot 2, representing one sixth or 16.7% of this second disposal. In Mr Besson’s letter dated 26 March 2003, Mr Catley’s recommendation based on value had been 156,000:230,000, or 67.8%.
115.	The question of value is outside my jurisdiction, requiring reference to the Lands Tribunal if the parties are unable to reach agreement. I am not in a position to carry out accurate measurements of the areas shown, respectively, as permitted area and non-permitted area immediately prior to the sale of Plot 2. However, I am unable to see anything obviously wrong with plan DV4B as drawn by Mr Catley.
116.	In the absence of indications on the plan of the precise areas making up the constituent elements, I consider that it is necessary for plan DV4B to be redrawn to show both the permitted area of 2.03 acres and the area of the balance of Plot 2, in order to arrive at the proportion of Plot 2 which falls outside the permitted area. This proportion should then be taken into account in arriving at the amount of the gain on Plot 2.
117.	Mr Kelly asked for a ruling as to the basis on which the sales proceeds of Plots 1 and 2 should be apportioned. The question is whether the ratio of the non-exempt area to the balance of the area of each plot should be applied to the sales proceeds of that plot, or whether the proportions of those proceeds attributable to the non-exempt area and the exempt area respectively should be arrived at on the basis of the respective values of those areas. He indicated that HMRC had no preference as to area or value. The more logical basis appears to me to be a test based on area, as the apportionment is one following a decision as to “permitted area”. The precise method of arriving at a value for the constituent elements of each plot sold would be a question of valuation falling outside my jurisdiction, and would be for the parties or the Lands Tribunal to resolve. I therefore rule that the apportionment of sales proceeds as between the non-exempt areas and the exempt areas of each plot should be arrived at by reference to their respective areas.
The period of ownership
118.	Although the capital gains tax legislation has existed since 1965, there appears to be no published decision dealing with the issue arising in this case. I understand that there may have been a decision on the point made by one of my predecessors, at a time before Special Commissioners’ decisions were required to be published. Any such decision is not strictly binding on me, although it may be assumed that HMRC’s practice would be based on it, as information on non-published Special Commissioners’ decisions was circulated within HMRC, while not necessarily available to taxpayers or their advisers. To refer to such decisions would cause difficulty, as it would not be possible to publish details because the hearings took place in private. I therefore consider the question afresh, without reference to any other decision.
119.	On one interpretation of Mr Henke’s argument, it would not be quite the same as in Mr Kelly’s description. Mr Henke referred to the position of the land and buildings as at the moment of disposal; as I understand this reference, he was contending that if a piece of land has a dwelling-house on it which is used as a principal private residence as at the time of disposal of that land with the house on it, this governs the position whatever the previous history of the land and house. In effect, this would be to treat the circumstances prevailing at the time of disposal as it they had applied throughout the period of ownership. On this basis, it would not be correct to sub-divide the period of ownership into two parts consisting of the period while there was no house on the land and the period while Old Oak House was on the land. In a way, this argument would be a “mirror image” of his earlier argument concerning the permitted area being fixed from the beginning; in this case, the use of the house at the time of disposal would govern the treatment throughout the period of ownership.
120.	In this connection, Mr Henke referred to Varty v Lynes. I do not think that this assists the review of s 223(1) TCGA 1992. As mentioned above, Brightman J was contrasting the predecessor to s 222(1)(a) with that to s 222(1)(b). The latter was looking only to the present, while the former was looking both to the present and the past. Section 223(1), a provision applying a separate test, is looking at a period, as it uses the words “ . . . has been . . . throughout the period of ownership”; it is not merely looking at the instant of disposal.
121.	I therefore do not accept the argument that the test under s 223(1) is solely directed to the state and condition of the dwelling-house and land at the point of disposal. However, this deals only with part of the general submission which Mr Henke made, that he did not consider an apportionment to be appropriate. He argued that “ownership” in s 222(1)(a) together with the word “disposal” in s 222(1) must convey a meaning of controllership in the use of the dwelling-house during its period of availability, ie June 1993 to the disposal dates. “Ownership” of the dwelling-house had not existed outside these dates. 
122.	In relation to this argument, the difficulty is that highlighted by Mr Kelly. Section 223(1) refers to the period of ownership. Buildings cannot (at least in normal circumstances) be owned separately from the land on which they are situated. By s 288(1) TCGA 1992, for the purposes of the Act, “land” includes houses and buildings of any tenure. Mr Kelly confirmed the Crown’s acceptance that Mr and Mrs Henke owned one asset, the land and buildings at Houghton. Thus the ownership of the single asset has subsisted since 1982, with subsequent changes to that asset, these changes consisting of the construction of the buildings, the disposal of Plot 1 and the disposal of Plot 2. Is the test relating to the “period of ownership” to be applied to that single asset, or should it have regard only to the period for which the dwelling-house has been in existence?
123.	Although there are special provisions concerning “period of ownership” in s 222(7) TCGA 1992, these do not amount to a definition. No specific definition of the expression occurs either within ss 222-226 or elsewhere in TCGA 1992. It is not specifically provided anywhere within the Act that an individual can be regarded as having a period of ownership of a dwelling-house separate from his period of ownership of the land. Given the definition of “land” in s 288(1), this is not surprising. I accept Mr Kelly’s arguments as to the consequences, in terms of anomalies and absurdities, of an interpretation that would permit the ownership of a dwelling-house to be looked at separately from the ownership of the land. In my view the Parliamentary intention behind the legislation is clear; there is to be only one period of ownership, of the single asset consisting of the land and any buildings which may be erected on it during that period. It follows that an apportionment is required where land is held for a period and subsequently a house is built on it and occupied as the individual’s only or main residence.
124.	My conclusion is that as Mr and Mrs Henke did not occupy Old Oak House until 1993, but had owned the land at Houghton (as legal owners and beneficial joint tenants of the freehold) since 1982, an apportionment is required under s 223(2) because they do not meet the “throughout the period of ownership” condition in s 223(1). Taking account of the anomalies mentioned by Mr Kelly, I would have regarded it as particularly odd if Mr and Mrs Henke could have continued to qualify for private residence relief in respect of their two previous owner-occupied properties while benefiting at the same time from the same relief in respect of their unbuilt plot at Houghton. I do not accept Mr Kelly’s “blanket” reference to an individual only being able to have one “only or main residence” at any given point of time, because in practice there may be exceptions such as the use by an individual of the three year period under s 223(2)(a) for his previous “only or main residence” at the same time as he owns a new house qualifying for relief. However, I agree that the overall scheme of the legislation is to provide a single exemption.
Summary of conclusions on the main issues
125.	I hold that:
(1)	the discovery assessments for 1999-2000 were validly made;
(2)	in relation to 2000-01, the amendments to Mr and Mrs Henke’s returns on the conclusion of the enquiry were validly made;
(3)	the allocation of allowable costs is to be dealt with in accordance with paragraphs 105 and 106 above;
(4)	the permitted area on both occasions was 0.82 hectare (2.03 acres), as indicated on plans DV4A and DV4B, and the apportionment of the sales proceeds of the plots sold should be on the basis of the respective areas of the non-exempt and the exempt areas;
(5)	an apportionment is required, to limit private residence relief to that proportion of the period of ownership of the land during which Old Oak House was the Henkes’ only or main residence.
The form of computations
126.	As mentioned above, Mr Kelly asked, if I found in favour of the Crown, to approve the basic structure of the computations as set out in his skeleton argument. Subject to a very minor adjustment in relation to the allocation of costs, all the above findings are in favour of HMRC, so I agree the proposed formulation:
(1)	indexation is to be taken into account;
(2)	the 2000-01 gain needs to be tapered so that only 95% of the gain is chargeable, but no taper relief is due for 1999-2000;
(3)	from the sale proceeds of each disposal there needs to be deducted those expenses which it is determined either (a) relate solely to the plot sold, (b) fall to be apportioned using the A/(A+B) formula, or (c) are incidental costs of disposal. Indexation relief will then be applied to give a net gain;
(4)	this net gain will then be restricted by multiplying it by (x/y x m/n), where x/y is the ratio of the value of the land sold falling outside the permitted area to the gross sale proceeds (to give private residence relief for the gain within the permitted area), and m/n is the number of months from June 1993 to the disposal divided by the number of months from acquisition to the disposal (to eliminate private residence relief from the period before Old Oak House was occupied). For the October 1999 disposal of Plot 1 m/n I s77/206 and for the March 2001 disposal of Plot 2 m/n is 94/223;
(5)	once the gains have been reduced to account for private residence relief there will be a 5% reduction for 2000-01 for taper relief and the resultant gains will be split between Mr and Mrs Henke. The annual exempt amount will then be given to both Mr and Mrs Henke in full for each year, there being no other gains in either year. Tax will then be charged at the appropriate rates.
Further comments
127.	Although I have in nearly all respects found in favour of HMRC and against Mr and Mrs Henke, I would like to pay tribute to the enormous amount of work that Mr Henke has put into this dispute and in preparation for the hearing. I sympathise with the Henkes’ sense of grievance, but the statutory provisions do not provide them with the answers for which they had hoped. I have already expressed concerns as to the way in which the Henkes have been treated by various officers of HMRC. Mr and Mrs Henke were offered compensation, but as I understand the position, they refused as a matter of principle to pay the cheques into their bank accounts. Although I do not have jurisdiction over such matters, I hope that the offer of some form of compensation can be renewed, and that the suggestion in Mr Besson’s letter dated 26 March 2003 of some form of reduction in the interest on the tax ultimately due can be followed up. I would also like to thank Mr Kelly for his clear exposition of HMRC’s case.
128.	This decision is merely a determination in principle of the matters covered, leaving the final figures to be agreed or determined. I hope that agreement as to land values can be reached without further dispute. In the absence of agreement, this will have to be referred to the Lands Tribunal. Mr Henke questioned on what basis capital gains matters relating to land were required to be considered by the Lands Tribunal. I confirm that this is pursuant to s 46D TMA 1970.
129.	If the parties require me to make a final determination of the tax due once the figures have been agreed, I will issue a separate decision covering this.

JOHN CLARK

SPECIAL COMMISSIONER
RELEASE DATE: 2 May 2006

SC/3027/2005 

Authority referred to in skeletons and not referred to in the decision:

Lewis v Lady Rook [1992] STC 171
££Henke & Anor v Revenue & Customs [2006] UKSPC SPC00550 (02 May 2006)